Section 3: The Balance of Payments

Countries that engage in international trade experience inflows and outflows of products, services, currency purchases, and investments. The accompanying flows of money used to pay for these transactions are recorded in an accounting system called the balance of payments. The balance of payments consists of three main accounts: the current account, the financial account, and the capital account.

The Current Account

The current account records international transactions that typically represent a physical transfer of goods and services (exports and imports listed in categories 1 and 2 below), as well as transactions that provide income from persons or investment accounts in the United States to citizens in foreign countries, or vice versa (categories 3 and 4 below). The current account consists of the following four categories:

1. The merchandise trade accountThe merchandise trade account includes imports and exports of tangible products, such as cars, computers, clothes, and televisions. If a country imports more tangible products than it exports, it experiences a trade deficit. If it exports more tangible products than it imports, it experiences a trade surplus. 2. The services accountThe services account includes flows of international money payments for services such as transportation, insurance, banking, consulting, and tourism.3. The investment income accountThe investment income account reflects United States investment earnings from foreign stocks, bonds, and real estate, minus foreigners’ investment earnings from United States stocks, bonds, and real estate.4. The transfer payments account
The transfer payments account includes gifts from American citizens to friends or relatives living abroad and vice versa. It also includes retirement payments (for example, a Social Security check) to a person living abroad, and vice versa.

The Financial Account and the Capital AccountThe financial account includes the first two categories listed below, whereas the capital account includes all transactions listed under item 3. The total dollar value in the financial account is generally far greater than that in the capital account. The two categories of the financial account are therefore far more significant than the capital account category.

1. U.S.-owned assets abroadThe U.S.-owned assets abroad account includes official reserve assets, government assets and private assets (gold, foreign currencies, foreign securities, positions in the IMF, U.S. credits and other long-term assets, direct foreign investments, and U.S. claims reported by U.S. banks).2. Foreign-owned assets in the United StatesThe foreign-owned assets in the United States account includes foreign assets in the United States (securities, direct investments, U.S. currency, and U.S. liabilities reported by U.S. banks).3. Capital transfersThe capital transfers account includes debt forgiveness, migrants’ transfers (goods and financial assets accompanying migrants as they leave or enter the country), and transfers of titles to fixed assets and the transfer of funds to the sale or acquisition of fixed assets, gift and inheritance taxes, death duties, uninsured damage to fixed assets and legacies. It also includes the acquisition and disposal of non-produced and non-financial assets including sales and purchases of non-produced assets ((rights to natural resources, sales and purchases of intangible assets, such as patents, copyrights, trademarks, franchises, and leases).

A Debtor Nation
A country is called a “debtor nation” if its current account is negative. The United States became a debtor nation in the early 1980s primarily because its merchandise trade (exports minus imports) account became negative. Unlike popular belief, as we will see in the next section, this is not necessarily a bad thing for the country’s overall economy.

The Balance of The Sum of All Accounts is Zero

The balance of the sum of all accounts, including a statistical discrepancy, is zero. Given the size of the money flows and the difficulty in measuring the millions of international trade transactions, the discrepancy can be a substantial number. After taking the statistical discrepancies into account, the sum total of all accounts combined is zero.

Video Explanation
For an excellent explanation of the three components of the Balance of Payments and its meaning, please click below. Source: Investopedia (www.investopedia.com).

Please click HERE for the latest Bureau of Economic Analysis statistics on the United States Balance of Payments (click on “International”, then “Balance of Payments”). As an example, find a summary of this information for the first quarter of 2015 below.

United States Balance of Payments, Quarterly, Seasonally Adjusted Data for Q1, 2015 in Billions of Dollars